Executive Summary : Draft Shipbuilding Contract

This document provides a comprehensive analysis of a draft Shipbuilding Contract for the construction of a single Floating Production & Storage Unit (FPSO), designated as Hull No. 123. The contract outlines a detailed framework governing the relationship, responsibilities, and liabilities of the two primary parties: the BUILDER and the OWNER. 

Key takeaways from the contract include: 

Project Framework: The BUILDER is contracted to construct one FPSO vessel over a thirteen (13) month period from the contract's effective date. A critical feature is that the vessel's basis design and overall engineering support are to be provided by the OWNER. 

Financial Structure: The contract is based on a fixed price, payable in ten (10) distinct milestone instalments. To secure the OWNER's payments, the BUILDER is required to furnish a Performance Bond equivalent to 10% of the Contract Price upon receiving the first instalment. 

Risk Allocation for Delays: The contract establishes a clear distinction between "Permissible" and "Non-Permissible" delays. Permissible delays, including a wide range of Force Majeure events and delays caused by the OWNER, result in an extension of the delivery date. For non-permissible delays attributable to the BUILDER, a tiered system of liquidated damages is applied after a 15-day grace period, capping out at 210 days. The OWNER has the right to terminate the contract if non-permissible delays exceed 195 days. 

Supervision and Control: The OWNER retains significant oversight through the right to appoint representatives for on-site supervision and a mandatory plan/drawing approval process. The OWNER has a 14-day window for approvals; failure to meet this deadline grants the BUILDER an automatic delivery extension. 

Warranty and Liability: The BUILDER provides a twelve (12) month warranty covering defects in its own workmanship and materials. This warranty explicitly excludes items supplied by the OWNER, normal wear and tear, and misuse. Crucially, the contract includes a mutual limitation of liability, where both parties waive claims for any consequential damages, such as loss of profit, use, or business. The BUILDER also expressly disclaims standard implied warranties, including merchantability and fitness for a particular purpose. 

Legal and Dispute Resolution: English Law governs the contract. A tiered dispute resolution mechanism is in place: technical specification disputes are referred to a Classification Society surveyor for a final decision, compliance issues are decided by the relevant regulatory body, and all other disputes are to be settled through arbitration in London under the rules of the London Maritime Arbitrators Association (LMAA).

Conditions for Effectiveness: The contract is not immediately effective upon signing. Its activation is subject to several conditions precedent, most notably the OWNER successfully obtaining financing and Board approval within 60 days. 

1. Project Scope and Specifications 

The contract details the construction of a single, specialized vessel according to specific technical and regulatory standards.

Vessel Description: The BUILDER will construct one (1) Floating Production & Storage Unit (FPSO), identified by shipyard Hull No. 123. 

Design Basis: A key provision (Article 1.3.a) states that the vessel's design is not developed by the BUILDER. The contract specifies that "the vessel shall be constructed on the basis of a design developed and prepared by OWNER." The OWNER is also responsible for providing "overall engineering support including but not limited to structural mooring and risers." 

Governing Standards: Classification: The vessel must be built under the survey of DNV (the "Classification Society") to the class notation: +OI Floating Production & Storage Unit, COW, POSMOOR, OFFLOADING, HELDK S, CRANE, or an approved equivalent, free of any recommendations. The decisions of the Classification Society on compliance are final and binding on both parties.

Construction Standard: Construction must be performed "in a sound and workmanlike manner in accordance with good shipbuilding practice" (Article 1.5). 

Hierarchy of Documents: In case of any conflict or discrepancy between the contractual documents, the order of precedence is established as:   1. The Shipbuilding Contract   2. The Specifications   3. The General Drawings. 

2. Financial Framework

The contract establishes a fixed price with a structured payment schedule and provisions for security and price adjustments. 

Contract Price: The total price is a fixed amount in USD (to be inserted in Article 2.1) payable by the OWNER for the BUILDER's performance.

Payment Schedule: The Contract Price is payable in ten milestone-based instalments via electronic bank transfer. 

Milestone	Percentage of Contract Price
Upon approval of OWNER’S financing
Upon placing order of steel
Upon start of steel cutting
Upon keel laying (First block erected)
Upon fabricating of 50% steel hull
Upon fabricating of 100% steel hull
Upon erecting of 50% of steel hull
Upon erecting of 100% of steel hull
Upon Launching
Upon Delivery

Security: Upon receipt of the first installment, the BUILDER must rovide the OWNER with a Performance Bond for 10% of the Contract Price from a bank or institution satisfactory to the OWNER.

Price Adjustments: The Contract Priceis subject to adjustment based on agreed modifications, change orders, and penalties for delayed delivery. 

3. Delivery, Delays, and Remedies

The contract provides a detailed framework for the vessel's delivery timeline and the consequences of any deviation. 

Delivery Schedule and Location: The vessel is to be delivered afloat alongside the wharf at the BUILDER's yard thirteen (13) months from the contract's effective date. 

Permissible Delays (Force Majeure): The delivery date can be postponed for delays caused by circumstances beyond the BUILDER's control. Article 8.1 provides an extensive, non-exhaustive list, including:

Acts of God, war, riots, strikes, epidemics, and extreme weather.

Shortages or delays in delivery of materials, machinery, or equipment, provided they were reasonably expected to be on time when ordered.

Defects in materials that could not be detected with reasonable care.

Delays caused by the Classification Society or by the OWNER, including late approval of drawings or late delivery of "Owner's Supplies." 

Non-Permissible Delays and Liquidated Damages: For delays not classified as permissible, the following penalty structure applies: 

Grace Period: No penalty for the first fifteen (15) days of delay. 

Tiered Penalties: Beginning on the 16th day, the Contract Price is reduced by a daily amount: 

Days 16-60: US$ xxx per day

Days 61-90: US$ xxx per day

Days 91-120: US$ xxx per day

Day 121 onwards: US$ xxx per day

Maximum Damages: The total liquidated damages are capped at a maximum of 210 days. This is stipulated as the "OWNER’s exclusive remedy for delays." 

Right to Terminate for Delay: If non-permissible delays exceed 195 days, the OWNER has the option to terminate the contract. After this period, the BUILDER may demand in writing that the OWNER make an election to either terminate or accept a new delivery date. 

4. Supervision, Inspection, and Responsibilities

The contract outlines a clear division of responsibilities and a robust process for OWNER oversight. 

OWNER's Supervision Rights: Plan Approval: The BUILDER must submit plans and drawings for OWNER approval. The OWNER has fourteen (14) days to return them with approval or comments. If the OWNER fails to respond within this period, the BUILDER is entitled to an automatic extension of the delivery date. 

Owner’s Representative: The OWNER may appoint representatives to monitor construction at the shipyard. The BUILDER must provide them with office space and reasonable facilities. The BUILDER retains the right to request the replacement of any representative deemed "unsuitable and unsatisfactory." 

BUILDER's Obligations: Progress Reporting: The BUILDER must provide a detailed Work Schedule within 45 days of the effective date and submit a progress report to the OWNER's Representative every two weeks.

Notice of Tests: A minimum of five (5) days' written notice must be given for any material test, inspection, or milestone event. 

Liability and Indemnity: The contract establishes a reciprocal indemnity structure for personnel: 

BUILDER's Indemnity: The BUILDER is liable for injury to or death of its own and its subcontractors' employees, and indemnifies the OWNER, even if the incident is caused by the OWNER's negligence. 

OWNER's Indemnity: The OWNER is liable for injury to or death of its own and its contractors' employees, and indemnifies the BUILDER, even if the incident is caused by the BUILDER's negligence. 

Property Damage: The BUILDER is liable for loss or damage to its own equipment and the Vessel during construction, indemnifying the OWNER unless the damage is attributed to the OWNER's negligence or fault. 

5. Modifications, Changes, and Supplies

The contract contains procedures for managing changes to the vessel's specifications and for integrating equipment supplied by the OWNER. 

Contract Modifications: The OWNER may request reasonable modifications. If the BUILDER agrees, the parties must execute a written Protocol detailing adjustments to the contract price, payment schedule, and delivery date. 

Regulatory Changes: If rules or regulations change after the contract is signed, the parties must meet in good faith to agree on necessary alterations to the vessel and corresponding adjustments to the contract's price and schedule. 

Owner's Supplies (OFE):

OWNER's Responsibility: The OWNER is responsible, at its own cost and risk, for delivering all specified OFE to the BUILDER's yard according to a schedule provided by the BUILDER. 

Consequences of Delay: If the OWNER fails to deliver OFE on time, the vessel's delivery date is automatically extended. If the delay exceeds thirty (30) days, the BUILDER can proceed with construction without installing the item(s). If cumulative delays related to OFE (delivery, commissioning, defects) exceed 90 days, the BUILDER has the option to rescind the contract. 

6. Warranty and Liability Limitations

The post-delivery obligations of the BUILDER are strictly defined and limited. 

Guarantee Period: A twelve (12) month warranty period commences from the vessel's delivery date. 

Scope of Warranty: The warranty covers defects in the BUILDER's workmanship and materials. It does not cover: 

Equipment and materials furnished by the BUILDER but manufactured by others (for these, the BUILDER assigns vendor warranties to the OWNER). Owner's Supplies (OFE). 

Defects arising from misuse, unauthorized alterations, normal wear and tear, corrosion, accidents, or improper maintenance. 

Remedy Process: The BUILDER's liability is limited to repairing or replacing the defect at its own yard. If repair elsewhere is necessary, the OWNER must give notice, and the BUILDER has the right to verify the defect. Upon acceptance, the BUILDER will pay the mutually agreed, documented cost of repairs. 

Express Disclaimers and Liability Limitation: Article 9.9 contains significant liability limitations. 

The BUILDER: Disclaims All Other Warranties: The stated guarantee is "in lieu of all other guarantee, warranty and/or condition (except of Title), express, implied or statutory." This includes disclaiming warranties of merchantability, fitness for a particular purpose, and seaworthiness. 

Excludes Consequential Damages: The BUILDER is not liable for "loss of profits or earning... or any other incidental, consequential or special damages," including wreck removal or pollution fines, regardless of cause or negligence. A separate general clause (Article 22) makes this limitation of liability for consequential loss mutual between both parties. 

7. Default and Termination Provisions

The contract specifies the conditions under which either party can be considered in default and the resulting consequences. 

OWNER's Default: Includes failure to pay instalments, failure to take delivery of the vessel, or insolvency. 

Consequences: The BUILDER may charge interest (LIBOR + 2%) on late payments. If default is not cured within a 30-day notice period, the BUILDER can suspend performance and ultimately terminate the contract, retain all instalments paid, and sell the vessel. 

BUILDER's Default: Includes material breach of contract, failure to comply with an arbitration award, or insolvency. 

Consequences: The OWNER has the right to terminate the contract. Upon termination, the OWNER may elect to take delivery of the incomplete vessel, with the purchase price adjusted for its state of completion and reduced by the maximum liquidated damages amount. 

8. Legal and Administrative Framework

The contract's legal foundation, dispute resolution process, and conditions for its activation are clearly defined. 

Governing Law: English Law governs the validity and interpretation of the contract. 

Dispute Resolution: A three-tiered process is established: 

Technical Conformity: Disputes over design, materials, or workmanship relative to the Specifications are referred to a surveyor from the Classification Society (DNV), whose decision is final and binding. 

Regulatory Compliance: Disputes regarding compliance with Class rules are referred to the Classification Society itself, whose decision is final and binding. 

All Other Disputes: All other matters are referred to arbitration in London, UK, conducted under the Arbitration Act 1996 and the rules of the London Maritime Arbitrators Association (LMAA). 

Conditions Precedent: The contract only becomes effective after several conditions are met (Article 19):

 ·    Signing by both parties.

·    OWNER obtaining financing and Board approval within 60 days of signing (failure to do so renders the contract null and void).

·    BUILDER's receip of the first installment payment.

·    BUILDER placing an order for 1000 tons of steel.

Insurance: From keel-laying until delivery, the BUILDER must, at its own expense, insure the vessel under a Builder's All Risk policy for the full contract value. The policy is to be in the joint names of the BUILDER and OWNER, and the BUILDER is responsible for bearing any applicable deductible. 

Suspension: The OWNER has the right to suspend work at any time for a period not to exceed 6 months. If this right is exercised, the OWNER must reimburse the BUILDER for reasonably incurred costs, including standby charges, demobilization/remobilization, and costs for maintaining the suspended work.